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Choose English law to govern just the amendments-in-writing provision?

In May of this year, the UK Supreme Court rejected the old “Cardozo Rule,” which held that, even if a contract contained an amendments-in-writing or waiv­ers-in-writing clause, a party to the contract would still be free to claim that the writing requirement was orally waived and therefore an oral variation was enforceable. [1]  The court’s holding might embolden contract drafters to choose English law to govern an am­end­ments-in-writing or waivers-in-writing clause while ex­press­ly- or im­pli­cit­ly choosing a different law for the rest of the contract.

[1] Rock Ad­ver­t. Ltd v MWB Bus. Ex­ch. Ctrs. Ltd, [2018] UKSC 24 (Sump­ton, L.), dis­agree­ing with Beatty v Gug­gen­heim Ex­plor­a­tion Co., 225 N.Y. 380, 387-88 (1919) (Cardozo, J.).  Hat tip: Rachael Clem­ents and Aimee Donaldson, No Oral Modification Clauses – Firmly Set In Stone (Sept. 27, 2018).

The old Cardozo Rule: “No oral modification” clauses don’t count

Courts have sometimes held that at common law, parties are free to orally amend or waive a con­tract provision (subject to any applicable requirements of the Statute of Frauds), even if the contract expressly states that all amend­ments and waivers must be in writing.  Courts sometimes quote something that then-Judge (later Justice) Cardozo said in a 1919 New York case:

Those who make a contract, may unmake it. The clause which forbids a change may be changed like any other. The prohibition of oral waiver may itself be [orally] waived. Every such agreement is ended by the new one which contradicts it … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again.

Beatty v Guggenheim Exploration Co., 225 N.Y. 380, 387-88 (1919), quoted in Israel v. Chabra, 12 N.Y.3d 158, 163-64 (2009) (emphasis added, internal citations and quotation marks omitted).

(Some statutory provisions expressly validate no-oral-variation clauses; see the commentary to the Common Draft amendments-in-writing clause.)

The UK Supreme Court rejects the Cardozo Rule

In Rock Advertising, the UK Supreme Court quoted the Cardozo Rule in its sur­vey of laws governing no-oral-variations clauses in contracts. Id. at ¶¶ 7-9.  The court concluded, however, that “the law should and does give ef­fect to a con­tractual pro­vi­sion requiring spe­cified formalities to be ob­served for a var­iation.” Id. at ¶ 10 (emphasis added). Lord Sumpton branded as “a fal­la­cy” the rat­ionale that the importance of party autonomy precludes parties from “validly bind[ing] them­selves as to the man­ner in which future chan­ges in their legal relations are to be achieved”; he noted that:

  • by entering into a contract in the first place, the parties are limiting their future autonomy to a certain extent; and
  • “There are many cases in which a particular form of agreement is pre­scribed by statute …. There is no principled reason why the parties should not adopt the same principle by agreement.”

Id. at ¶ 11.

The judge explained why no-oral-variation clauses can make business sense:

There are at least three reasons for including such clauses.

The first is that it prevents attempts to undermine written agreements by in­form­al means, a possibility which is open to abuse, for example in raising de­fen­ces to summary judgment.

Secondly, in circumstances where oral discussions can easily give rise to mis­­understandings and crossed purposes, it avoids disputes not just about whe­ther a variation was intended but also about its exact terms.

Thirdly, a measure of formality in recording variations makes it easier for corp­­orations to police internal rules restricting the authority to agree them.

These are all legitimate commercial reasons ….  I make these points be­cause the law of contract does not normally obstruct the legitimate in­ten­tions of businessmen [sic], except for overriding reasons of public policy. Yet there is no mischief in No Oral Modification clauses, nor do they frustrate or contravene any policy of the law.

Id. at ¶ 12 (emphasis and extra paragraphing added).

For additional com­men­tary on the Rock Advertising case, see Glenn D. West, Cognitive Dissonance in the Common Law of Contracts: Oral Mod­i­fi­ca­tions to Written Agreements that Purport to Invalidate Oral Modi­fi­ca­tions  (May 29, 2018).

So: Choose English law to govern no-oral-variations clauses?

A bold American contract drafter might want to try to take advantage of the Rock Advertising holding by using a targeted, single-clause choice of law, per­haps along the lines of the following language:

The parties expressly agree that this provision [OP­T­IONAL: but no other] is to be interpreted and applied in ac­cord­ance with English law as announced in Rock Ad­ver­t. Ltd v MWB Bus. Ex­ch. Ctrs. Ltd, [2018] UKSC 24.

After all: Choice-of-law clauses are widely used and readily enforced in the United States (unless the choice of law offends some public policy of the forum state), as discussed in the commentary to the Common Draft gov­ern­ing-law provision.

It might seem strange for a contract to specify different choices of law to gov­ern dif­fer­ent clauses of the contract.  But conceptually this isn’t unheard of:

  • In the 1988 update to the Restatement (Second) of Conflicts of Laws, comment i to § 187 states in part that “the parties may choose to have different issues involving their con­tract governed by the local law of dif­fer­ent states.”  The comment cites  Kronovet v. Lipchin, 288 Md. 30, 415 A. 2d 1096 (1980), in which loan docu­ments for a real-estate project ad­opt­ed local Maryland law for interest- and usury issues but New York law for others.
  • In its Akorn decision earlier this week, the Delaware chancery court ob­served: “At­ten­t­ive readers will have noted that none of the parties to the Mer­ger Agree­ment is a Delaware entity. … The parties nevertheless chose Delaware law to gov­ern the Mer­ger Agreement (excluding internal affairs matters gov­erned by Lou­i­si­a­na law) and selected the courts of this state as their ex­clu­sive forum for litigation.” Akorn, Inc. v. Fresenius Kabi AG, No. 2018–0300–JTL, slip op. at 11 n.14 (Del. Ch. Ct. Oct. 1, 2018).
  • The EU’s Rome I Regulation on contractual obligations states in Article 3.1 that “… By their choice the parties can select the law applicable to the whole or to part only of the contract.”
  • An international contract might specify that it is to be governed by the laws of, say, Brazil, but that any arbitration is to be “seated” in England, which might well mean that the arbitration pro­ceed­ings would be gov­erned by Eng­lish law.  That was precisely the holding of an English court in Sul­america CIA Nacional De Seg­ur­os SA & Ors v Enesa Engenharia SA & Ors, [2012] EWCA Civ 638, dis­cussed in Sherina Petit and Marion Edge, The gov­ern­ing law of the arb­i­tra­tion agree­ment Q&A, in Norton Rose Ful­bright, Int’l Arbitr. Rpt. 2014 – issue 2.  I also seem to re­member seeing (but can’t lay my hands on) at least one contract that ex­press­ly speci­fied one country’s law to govern the contract but another country’s law to govern arbitration proceedings.
  • Domestic contracts often specify that the substantive law of a particular jur­is­dic­tion will apply — which implicitly leaves in place the procedural law of the for­um state — or they might specify a jurisdiction to provide both sub­stantive and procedural law, although a court might not honor a choice of procedural law.   See generally (the extremely-useful) John F. Coyle, The Canons of Con­struc­tion for Choice of Law Clauses, 92 Wash. L. Rev. 631, 648-55 (2017).  When a contract requires that amendments and waivers be in wri­ting, it like­wise amounts to a choice of procedural rules.

What grounds might exist for disregarding such a choice of law?

A clause-specific choice of law is unlikely to work when the clause in question offends a public policy of the forum state.  See the examples in the com­ment­ary to the Common Draft governing-law clause.  As the Rock Ad­ver­ti­sing court notes, however, it’s not as though a no-oral-variation clause would offend pub­lic policy.

One more possible concern:  What if neither the parties, nor the subject of the con­tract, had anything to do with Eng­land — would that dissuade a U.S. court from applying English law?  Probably not:  The parties’ joint desire for a neu­tral, well-established law such as that of New York, Delaware, or England would likely be honored as an “oth­er rea­son­able basis for the parties’ choice.” Restatement (Second) of Con­flicts of Laws, § 187(2)(a) (1971).

Compare the related subject of choice of forum, where the Supreme Court said:

Not surprisingly, foreign businessmen prefer, as do we, to have disputes re­solved in their own courts, but if that choice is not available, then in a neu­tral forum with expertise in the subject matter. Plainly, the courts of Eng­land meet the standards of neutrality and long experience in admiralty litiga­tion. The choice of that forum was made in an arm’s-length negotiation by ex­per­i­enced and sophisticated businessmen, and absent some com­pel­ling and countervailing reason it should be honored by the parties and en­forced by the courts.”

The Bremen v. Zapata Off-Shore Co., 407 US 1, 11-12 (1972).  Similar con­sid­er­ations would seem to favor allowing parties to choose a neutral, established law to govern their contract, even when they have no other connection to the jurisdiction of that law.

Proving oral waiver of the choice of English law could be tricky

Suppose that a contract chose English law for the amendments- and waivers-in-writing clauses.  Even so, a contracting party, following Beatty, might still try to claim that the parties had orally agreed to amend or waive, not just the par­tic­­u­lar pro­vision in dispute, and not just the writing requirement, but also the English choice of law.  Imagine the opening statement at trial:  Ladies and gen­tle­men of the jury, the landlord and my client, the tenant, orally agreed to three things:  That the landlord would reduce the monthly rent; that the lease’s no-oral-modifications clause was waived; and the lease’s choice  and the lease’s choice of English law for that requirement was also waived.”  Many judges and jurors would rightly be skeptical of such an argument.

Question to readers: What other contract clauses might benefit?

I’d welcome any suggestions as to any other contract provisions that might benefit from a clause-specific choice of law.

Acknowledgements

Many thanks to Professor John F. Coyle and noted corporate lawyer Glenn D. West for their input; any errors and/or inanities are of course mine alone.

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